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Raven Falls on Q3 Earnings Miss, Hit by Weak End Markets

Raven Industries Inc. 's RAVN third-quarter fiscal 2016 (ended Oct 31, 2015) earnings per share slumped nearly 28% to 13 cents from 18 cents earned in the year-ago quarter due to lower sales volumes in all three divisions. Earnings also trailed the Zacks Consensus Estimate of 17 cents, a negative earnings surprise of 23.5%. The impact of depressed market conditions within the agriculture and energy markets on Applied Technology and Engineered Films and the absence of completing a significant international pursuit within Vista Research which led to sales declines in Aerostar were the reasons for the weak performance. This has resulted in a 9% drop in Raven's share price since reporting results on Nov 24.

Including one-time items, Raven reported a loss of 4 cents per share in the quarter as against earnings per share of 18 cents in the year-ago quarter.

Raven Industries Inc. (RAVN) - Earnings Surprise | FindTheCompany

Operational Update

Sales declined 26% year over year to $67.6 million in the third quarter. Excluding sales from contract manufacturing, net sales were $67 million, down 21% from the third quarter of fiscal 2015. All three divisions reported a decline in sales.

Cost of sales decreased 23% year over year to $51.4 million. Gross profit decreased 34% to $16.2 million from $24.3 million in the year-ago quarter. Gross margin contracted 280 basis points year over year to 23.9%. Selling, general and administrative expenses declined 24% to $7.5 million in the quarter compared with $9.9 million in the year-ago quarter thanks to the company's cost reduction effort.

Including a pre-tax non-cash goodwill impairment charge of $7.4 million, pre-contract cost write-off of $2.9 million and an earn-out liability reduction benefit of $1.5 million, all related to Raven's Vista Research business, Raven reported an operating loss of $2.7 million as against operating income of $10.2 million in the prior-year quarter. Adjusted operating income slumped 39.6% year over year to $6.1 million due to lower sales volumes in all three divisions, partially offset by lower corporate spending.

Segment Performance

Applied Technology : Sales for the segment declined 36% year over year to $21.3 million. Excluding contract manufacturing sales, sales declined 32% from $31.6 million in the year-ago quarter. Sales to OEMs and the aftermarket declined by approximately 41% and 26%, respectively, due to significantly lower OEM sales volume year over year. Operating income also decreased 49% to $3.3 million from $6.4 million in the prior-year quarter, primarily due to lower OEM sales volume.

Engineered Films : The segment reported sales of $36.9 million, which decreased 10.5% year over year. Excluding contract manufacturing sales, sales declined 32% from $31.6 million in the year-ago quarter. Continued weak demand in the energy market as a result of lower oil prices and drilling activities resulted in the decline. Operating income however increased 12% year over year to $6.1 million helped by the Integra acquisition and favorable raw material cost developments, partially offset by markedly lower sales into the energy market.

Aerostar: Sales at the segment were $9.5 million, a 51% plunge from $19.2 million in the prior-year quarter. Excluding sales from contract manufacturing, second-quarter net sales were $8.8 million, down 29% from the third quarter of fiscal 2015. The decline was due to lower Vista Research sales, which declined $4.5 million year over year. Sales of stratospheric balloons were flat year over year while sales of aerostats were up $1.6 million year over year.

The segment posted adjusted operating income of $0.5 million, down 84% year over year, pulled down by the substantial decline in sales for Vista Research, partially offset by higher aerostat sales.

Financial Update

Raven ended the quarter with cash and cash equivalents of $32.5 million compared with $66.6 million at the end of the year-ago quarter. The company generated cash flow from operations of $35 million for the nine-month period ended Oct 31, 2015, compared with $45.7 million in the same period last year.

In the reported quarter, Raven repurchased nearly 1.1 million shares at an average price of $17.59 for a total of $18.5 million. So far in fiscal 2015, Raven has repurchased 1.6 million shares at an average price of $18.31 per share for a total of $29.3 million. The remaining authorization stands at $10.7 million.

Other Developments

Subsequent to the end of the third quarter, Raven signed a new long-term agreement with CNH Industrial N.V. CNHI . The deal will help in expanding the use of Raven's products and technology through the global dealer network for CNH Industrial brands, Case IH and New Holland Agriculture.

Raven also completed the expansion of a new production line in Engineered Films to pursue growth opportunities within the industrial segment in fiscal 2017.

Outlook

The company anticipates weak market conditions to continue in Engineered Films and Applied Technology for the foreseeable future. In the fiscal fourth quarter, the company apprehends tough year-over-year comparisons in both Aerostar and Engineered Films.

The company will, however, strive to maintain costs and remain focused on executing its key initiatives with an eye on the long term such as the new cast line for Engineered Films, the Hawkeye sprayer control system for Applied Technology and the design and manufacturing of the stratospheric balloon product line in Aerostar. Raven expects to return to growth in fiscal 2017 despite continued weakness in the end markets.

South Dakota-based Raven is an industrial manufacturer offering a variety of products for agricultural, industrial, construction and aerospace markets. The company operates through three business segments, namely, Engineered Films, Applied Technology and Aerostar.

Raven currently carries a Zacks Rank #3 (Hold). A couple of better-ranked diversified-operations stocks include Compass Diversified Holdings CODI and Federal Signal Corp. FSS , both carrying a Zacks Rank #2 (Buy).

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RAVEN INDS INC (RAVN): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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